The Next Oil Embargo

October 30, 2017 by Denis Pombriant

US oil production and imports up to the beginning of hydraulic fracturing boom.

The 1973-74 Arab oil embargo was a clear demonstration of how crippling a disruption in the global oil supply can be and perhaps a foretaste of future east-west relations. The OPEC cartel was formed in 1960 and came into effect in 1961 roughly with John F. Kennedy’s inauguration. The US produced more than 7 million barrels (bbls) of crude oil per day that year against a domestic demand of 9.98 million bbls. By 1973 it was a different story.

U.S. oil production peaked at 9.9 million bbls/day in December 1970 and began a long decline to less than 4 million bbls/day by September 2008. The situation dramatically reversed, rising to more than 9.4 million bbls/day in September 2015 after oil field explorers began using horizontal drilling and hydraulic fracturing (fracking) to find and extract more oil. But while this development was welcomed it also highlighted the problem of dwindling oil reserves across the planet, including in the Middle East.

Hydraulic fracturing is one of several secondary oil recovery techniques that the industry relies on when well production slows or becomes uneconomic. Without fracking wells are often closed down but fracking is like squeezing a damp sponge—you can always get a little more out of the sponge but it’s not nearly as much as you got from the first squeeze. Fracking squeezes an oil well.

All of this is important because as OPEC resources dry out the remaining reserves on the planet are either hard to get at, think the Arctic circle, or held by people who would use oil as a geostrategic tool—oh, let’s just call it a weapon and be done with it—to advance national policy, think Vladimir Putin. To be fair to Putin, an admittedly strange phrase, he learned about the geostrategic uses of petroleum from the best, us, the nations of the western alliance.

The rest of the world produced a glut of oil beginning in the 1980s by pumping large quantities from places like the North Sea and OPEC where Saudi Arabia could always be counted on as the swing producer, the one that could always pump a little more. The glut kept prices down and wrecked Russia’s ability to generate revenues on its hydrocarbon reserves. Compelled to compete in another space race to develop orbiting weaponry, i.e. Star Wars, the Soviets went broke and the old Soviet Union shattered.

Putin was in the KGB at the time and learned the lessons of oil hegemony well. When he came to power one of his first acts was to increase state control over the Russian oil industry and today the Russian state controls about 50 percent of it, which it is increasingly using to influence global events. A story in the New York Times on October 29 says,

Russia is increasingly wielding oil as a geopolitical tool, spreading its influence around the world and challenging the interests of the United States.

Russia is lending money to other oil rich countries like Venezuela, whose oil industry is in disrepair and faltering, despite its great reserves, after years of mismanagement. Venezuela needs hard currency to pay its bondholders and Moscow is happy to provide the case for discounted oil. Other countries feeling Russia’s love include China, Cuba, Egypt, and Vietnam, all places where the US is stumbling or disengaged. Rosneft, the Russian state oil company is also trying to gain influence in northern Iraq and Kurdish territory as well as Iran as tensions between Tehran and Washington increase.

As peak oil begins to bite and oil reserves that the west has traditionally relied on continue to decline, Russia is setting itself up to be the oil producer of last resort, which would enable it to name its price or simply restrict flow potentially destabilizing the western alliance much as the OPEC oil embargo did in 1973. In October 1973, OPEC raised the posted price of oil by 70 percent and announced a 5 percent reduction in output to be increased by 5 percent monthly until it achieved its political objectives, which were related to losing the Arab-Israeli conflict initiated by surprise on Yom Kippur also in October 1973.

In the current geopolitical climate an oil embargo can take many forms. We think more about peak oil as an economic issue and what to do about it is, for many people, rooted in the nebulous future. Converting to electricity to propel cars and other transport would do much to reduce oil demand eventually but future EVs won’t do much for people needing a tank of gas tomorrow if supplies are curtailed.

Also, many other parts of the economy rely on fossil carbon not as a fuel but as a starting point for manufacturing. For example, it takes 5 gallons of crude oil to make the rubber that goes into an average car tire. Curtailing fuel delivery, or at least rationing it, could have disastrous ripple effects throughout the western economy and cause further destabilization.

That’s why Peak Oil is becoming the major issue of our times. It’s a camouflaged oil embargo waiting to happen.

We’re not talking about it much but corporations and some governments are beginning to take it seriously. That’s why the recent announcements by GM and Ford about their near-term plans to bring fleets of electric vehicles to market are so important. But electric cars make up a half-loaf solution, without a new infrastructure that generates electricity from renewable sources we’ll still be tied to global fossil fuel supplies that may become unstable. All of this doesn’t even begin to address fossil fuels’ other problem, pollution.